What is contingency in building contract ? how to consider it is in the Estimation ?

Typically, Contingency refer to a cost, and is a percentage of a contract value set aside for unforeseen circumstances or unpredictable changes in the scope of the work. The cost contingency which is included in a cost estimate, bid, or budget may be classified as to its general purpose, which is what it is intended to provide for. For a class 1 construction cost estimate, usually needed for a bid estimate, the contingency may be classified as an estimating and contracting contingency. This is intended to provide compensation for "estimating accuracy based on quantities assumed or measured, unanticipated market conditions, scheduling delays and acceleration issues, lack of bidding competition, subcontractor defaults, and interfacing omissions between various work categories".

Most of highly experienced cost estimators or cost engineers and quantity surveyors, has defined contingency as "An amount added to an estimate to allow for items, conditions, or events for which the state, occurrence, or effect is uncertain and that experience shows will likely result, in aggregate, in additional costs. Typically estimated using statistical analysis or judgment based on past project experience. Contingency usually excludes:

·         Major scope changes such as changes in end product specification, capacities, building sizes, and location of the asset or project

·         Extraordinary events such as major strikes and natural disasters

·         Management reserves

·         Escalation and currency effects

A contingency sum is an amount of money, usually expressed as a percentage, included in the project budget to allow for the unknown or unresolved aspects of a design. It is usual for the initial allowance to be as much as 25% to 30%.

When estimating the cost for a project, product or other item or investment, there is always uncertainty as to the precise content of all items in the estimate, how work will be performed, what work conditions will be like when the project is executed and so on. These uncertainties are risks to the project. Some refer to these risks as "known-unknowns" because the estimator is aware of them, and based on past experience, can even estimate their probable costs. The estimated costs of the known-unknowns is referred to by cost estimators as cost contingency.

Contingency "refers to costs that will probably occur based on past experience, but with some uncertainty regarding the amount. The term is not used as a catchall to cover ignorance. It is poor engineering and poor philosophy to make second-rate estimates and then try to satisfy them by using a large contingency account. The contingency allowance is designed to cover items of cost which are not known exactly at the time of the estimate but which will occur on a statistical basis."

The cost contingency which is included in a cost estimate, bid, or budget may be classified as to its general purpose, that is what it is intended to provide for. For a class 1 construction cost estimate, usually needed for a bid estimate, the contingency may be classified as an estimating and contracting contingency. This is intended to provide compensation for "estimating accuracy based on quantities assumed or measured, unanticipated market conditions, scheduling delays and acceleration issues, lack of bidding competition, subcontractor defaults, and interfacing omissions between various work categories." Additional classifications of contingency may be included at various stages of a project's life, including design contingency, or design definition contingency, or design growth contingency, and change order contingency (although these may be more properly called allowances).

A contingency sum is an amount of money, usually expressed as a percentage, included in the project budget to allow for the unknown or unresolved aspects of a design. It is usual for the initial allowance to be as much as 25% to 30%. This would be reduced as the design develops and is more resolved. By the time that construction starts the percentage may be as little as 3% to 5% of the contract price.

“Contingencies in Construction”

 Contingencies are downside risk estimates that make allowance for the unknown risks associated with a project.

Typically, contingencies refer to costs, and are amounts that are held in reserve to deal with unforeseen circumstances. However, they may also refer to other aspects of the project, for example, the program may include a contingency where it is important that a specific completion date is achieved.

A contingency may also refer to part of a contingency plan, that is a plan than can be enacted to mitigate project risks, such as adverse weather, an industrial dispute, supplier failure and so on.

Monetary contingencies are typically referred to in relation to the overall client for a project. However, other parties in the supply chain are also likely to include contingencies in their cost planning.

Whilst it is advisable for clients to hold a contingency, they might no wish to share this information with the rest of the project team, who may see a contingency as a license to exceed the budget in the knowledge that the client has a reserve that can be spent.

Contingencies are often expressed in terms of percentages. The percentage contingencies applied are at their greatest in the early stages of the project when there are the greatest number of possible risks. But they can then be reduced as better particulars about the project become available and some risks have passed or been overcome.

An example of how a contingency might be reduced during a project is set out below:

§  At the preliminary business plan stage, total cost estimates might include a 15% contingency.

§  In the elemental cost plan, this might reduce to 10% of fees and construction costs.

§  On awarding the contract, 5% of the contract value might be included as contingency in the cost plan.

In addition to a contingency, the client is likely to hold retention. Retention is a percentage (often 5%) of the amount certified as due to the contractor on an interim certificate, that is deducted from the amount due and retained by the client. The purpose of retention is to ensure that the contractor properly completes the activities required of them under the contract. Retention can also be applied to nominated sub-contractors, and the main contractor may also apply retention to domestic sub-contractors.